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Self-customization and price competition

Author

Listed:
  • Stefano COLOMBO

    ()

  • Paolo GARELLA

    ()

Abstract

New technologies increasingly provide firms with abilities to design self-customizable products, that can be redeveloped by end-users at their own expenses. The decision to market only a standard product or also a self-customizable one is a strategic one; we analyze this decision in a duopoly with product differentiation. In our model adding a customizable product cannibalizes part of own demand but also allows exploitation of a distinct segment of consumers who attach high value to customizability; it also diverts demand from the rival firm. Firms use second degree price discrimination, attaching a different price to the different products. We find the conditions leading to both firms introducing the self-customizable product, both refraining from it, and to asymmetric equilibria. Our results indicate that self-customization appears in equilibrium; it is profit improving; it can be used by only one or both firms according to the value of the market for customizability. It also leads to lower prices. An increase in consumers’ ability to self-customize reduces profits, while a higher cost of self-customization increases profits. Finally a first-mover advantage arises in offering a self-customizable product.

Suggested Citation

  • Stefano COLOMBO & Paolo GARELLA, 2018. "Self-customization and price competition," Departmental Working Papers 2018-09, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2018-09
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    File URL: http://wp.demm.unimi.it/files/wp/2018/DEMM-2018_09wp.pdf
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    More about this item

    Keywords

    self-customization; pricing; duopoly;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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